- Many US retailers performed poorly in this latest earnings season but Wal-Mart stores, Inc. bucked the trend. Why was this?
- Earnings per share in future quarters could go far higher than many suspect at present.
- Wal-Mart's low-cost brand along with online grocery shopping and free delivery options will keep earnings elevated.
Wal-Mart Stores, Inc. (NYSE:WMT) bucked the trend among retailers in the latest earnings season which may not necessarily be a sign of a strengthening company but really first indications of a weakening economy. Although retail sales weakened at the start of 2016, they have risen somewhat over the last month or so. However, for the first two months of the quarter, consumer spending was down which is why it came as no surprise to me why so many retailers struggled to post encouraging numbers this time round. In fact, Target (NYSE:TGT) sold off by 10%+ following its earnings release as guidance for second-quarter sales was weaker than originally predicted plus the company reported slowing quarterly sales.
This was not the case with Wal-Mart. Apart from getting revenue to almost $116 billion in the quarter, the retailing giant doesn't foresee volatility in traffic and maintains that growth will continue into the second quarter (sixth straight quarter of traffic growth in its US stores). Although the retailer is making great moves internally (such as shelling out higher wages and adopting e-commerce strategies), I believe there could be something else at play here. Always remember Wal-Mart doesn't need thriving retail spending in the US for its own top line to thrive. If the economy contracts, we have already seen how this retailer is able to steal market share - something that could be happening at the moment.
The chart below shows the collapse in retail spending that took place in the US in 2008. This meant that by and large, retail spending collapsed by 4% in 2009 which is huge and should have affected every retailer, especially a retailer the size of Wal-Mart. Well, it didn't. The company's top line grew $27 billion to reach $405 billion and earnings per share rose to $3.39 which made it one of the few companies to grow both its top and bottom line in that period. This is why Wal-Mart is one stock that you can never write off. Even if its valuation (currently has an earnings multiple of 15.1 which is close to its 10 year average) gets higher in the near term as its share price rises, increases in EPS will keep this valuation metric in check. The market is already pricing this in with a 10% rise in Wal-Mart share price to almost reach $70 a share.
Furthermore, one has to remember that recent wage increases were baked into the first quarter (operating margins were down by 30 points) so future quarters should not have this headwind. Moreover, I like the moves the company is making in e-commerce, despite only growing 7% last quarter which was well below previous growth rates. Wal-Mart is experimenting with different shipping options (such as its $50/year option) for goods that will be delivered in three days or less. This is encouraging and the company will change and adapt to customers feedback. Wal-Mart has to do better in this area and management knows it. E-commerce, pick-up and home delivery will only increase in the years to come and Wal-Mart will not be able to take advantage of this tailwind unless it is growing this division much quicker than the current rate.
Wal-Mart's arch rival Amazon (NASDAQ:AMZN) may have serious advantages over Wal-Mart with respect to the size of their product listings, delivery speed and fulfillment centers but Wal-Mart has the real estate where it can offer the personal touch. In fact, the company has its own employees loading the groceries into customers cars in what is known as the "curbside service" These initiatives are where Wal-Mart can gain back its lost market share. Customers order and collect but they still see the vendor which keeps the relationship strong if the experience is generally good.
To sum up, Wal-Mart was one of the few companies in the retail space which beat expectations in the most recent earnings season. Furthermore, the retailer has proven it has the brand and footprint to win back market share when retail sales are contracting. I like its new initiatives such as its curbside service and its decision to hike employee wages will eventually filter through to its bottom line. Many analysts turned bearish on this stock last year when the company announced it would see negative earnings growth in the near term due to near-term investments such as e-commerce and higher wages. However, the 11% upside surprise in the company's most recent quarter may have changed some analysts minds about the trajectory of this stock. The company's earnings multiple is now slightly above i5-yearear average, but if earnings growth continues this stock could easily go to $75+ in 2016.